Practical tips for surviving your customer's bankruptcy

It could happen at any time: A customer files for bankruptcy. Suddenly you find yourself thrust into an unfamiliar world, wondering when, or if, you'll get paid. Don't panic. There are ways to protect your interests.Immediately Stop All Collection Efforts A debtor commences bankruptcy by filing a “petition for relief” with the bankruptcy court. This automatically triggers a stay of all acts to collect pre-petition claims against the debtor. If you initiate or continue a collection action, the court can impose sanctions against you for violating the automatic stay. If the court determines that the violation was “willful” or intentional, you could be liable for payment of damages and attorneys' fees. Assess the Immediate Impact When your customer files for bankruptcy, it can no longer pay you for goods sold or services provided before the bankruptcy filing. Consequently, you could find yourself in default under your own borrowing arrangements or your vendors might place you on COD or cash-in-advance status because they are concerned about your ability to pay them. Even if the debtor considers you a “critical vendor” and seeks authority to pay all or part of your pre-petition claim, critical vendor status often is subject to strict conditions imposed by the debtor. The assistance of experienced creditors' rights or bankruptcy counsel may be needed in dealing with such matters. Determine if you have claims against the debtor • Does the debtor owe you any money for goods sold or services provided before the bankruptcy? If yes, a proof of claim should be filed in the debtor's bankruptcy case. • Does the debtor owe you money for goods sold and delivered in the 20 days before the bankruptcy case began? If so, you might have an administrative expense under Bankruptcy Code section 503(b)(9) for the value of those goods. • Are you in possession of the debtor's tooling or molds? Are you also owed money for goods or products produced for the debtor with the molds or tooling or for modifications, improvements or repairs made to the molds or tooling? If yes, you may have statutory lien rights against the debtor's tooling or molds.

• Were the debtor's obligations to you secured in any way? If so, your claim will be treated as a secured claim up to the value of the collateral.Determine if the debtor has claims against you • Do you owe money to the debtor? If so, you may have a right, subject to bankruptcy court approval, to set-off the amount you owe against the amount owed to you. • Did you receive any payments from the debtor in the 90 days before the debtor filed for bankruptcy relief? If yes, you may have received a preferential transfer and should consult with experienced creditors' rights or bankruptcy counsel to evaluate the potential preference claim and your defenses.Promptly gather your records Assemble copies of all contracts with the debtor; all unpaid invoices; all documents evidencing COD or cash-in-advance payment arrangements; all shipping records for goods sold and delivered to the debtor; payment records for the two years before the bankruptcy, including remittance advisories; and all evidence of communications with the debtor. These records will be necessary to document your claims and your preference defenses.

Get the facts and nothing but the factsTake note of the following from the Notice of Commencement or other pleadings received:

• The court where the case was filed. • The debtors name and assigned case number. Where a number of related businesses seek bankruptcy relief, the Notice will contain a list of debtor's and their respective bankruptcy case numbers. • The date on which, and the chapter of the Bankruptcy Code under which, the debtor sought bankruptcy relief. • In chapter 7 cases, the name of the trustee administering the case. • The date, time and place of the “meeting of creditors” – a public examination of the debtor. • The name of the claims/noticing agent if one has been retained in the bankruptcy case. File Your Claims ASAP In most bankruptcy cases, your primary objective will be getting paid on your claims against the debtor's bankruptcy estate. To avoid missing any Bankruptcy Court deadline or bar date for filing these claims, you should prepare and file your proof of claim or section 503(b)(9) request for payment of an administrative expense as soon as possible. Do Not Ignore Notices and/or Pleadings Related to the CaseImmediately review any notices or pleadings you receive in the bankruptcy case and take all necessary steps to protect your interests. If their meaning is unclear to you, promptly consult with creditors' rights or bankruptcy counsel to ensure that your rights and interests are protected.

Morning Roundup

Business headlines from Crain's Cleveland Business and other Ohio newspapers — delivered FREE to your inbox every morning. Sign up for the Morning Newsletter.